Commissioner Barnhart’s testimony last fall before the Ways and Means
Committee highlights concerns about delays and appeals in Social Security
Disability Insurance claim processing. MRRC researchers have long had
an interest in Disability Insurance and in interactions between Social
Security disability and retirement programs.

Earlier, MRRC researchers John Bound and Julie Cullen provided evidence
that the SSDI program seems to offer a fairly satisfactory level of coverage
(www.mrrc.isr.umich.edu/research/publications/Brief/ib_024.pdf). Recent
work by Olivia Mitchell and John Phillips featured in this newsletter,
however, examines the lengthy and somewhat arduous eligibility determination
process for disability claims and suggests that in some cases, people
in greatest need may not be eligible for disability benefits. Other work
by MRRC researchers Elizabeth Powers and David Neumark featured in this
issue studies the interdependence of Social Security programs, suggesting
that changes in one program may have implications for others.

MRRC will continue to support research addressing important policy issues
related to Disability Insurance, and program interactions, simulating
potential program changes, and studying possible behavioral implications
of modifications to retirement programs. Findings from this kind of research
will have important implications for solvency of the system.

Eligibility, Applications, Denials, and Appeals for
Social Security Disability Insurance by Olivia S. Mitchell and John W.
R. Phillips

Executive Summary

Researchers and policymakers have been interested in the extent to which
older workers who are in poor health may use Social Security Disability
Insurance (DI) as a path out of the labor force. Another path such workers
might take is early Social Security retirement. This has raised the question
of what effect raising the age of early retirement might have on applications
for DI. It is possible that older workers in poor health might apply for
DI rather than waiting for delayed Social Security benefits. Identifying
the characteristics of workers who might seek to use Social Security disability
insurance can provide policymakers with insight regarding the well-being
of the “at risk” population.

This Issue in Brief describes an empirical investigation using data from
the University of Michigan Health and Retirement Study (HRS) linked with
administrative earnings records for a cohort of individuals nearing retirement.
With these linked data, we examined the sociodemographic and health characteristics
of workers along the continuum of eligibility, application, denial, and
appeal for disability benefits. Regarding eligibility, we find that, while
the safety net program covers most American workers, a substantial group
of older women remains without coverage. We find that older people in
poor health and with low economic status are more likely to apply for
DI, as compared to those reporting no health problems and with more assets.
Few factors distinguish between applicants awarded versus denied benefits
and between those who appeal rejected applications versus those who do
not.

Eligibility Rules

American workers earn “Quarters of Coverage” (QCs) based on annual Social
Security payroll tax contributions. Eligibility for Social Security retirement
benefits requires that a worker must have earned 40 QCs over her career,
a total that can be earned in as few as ten years. Once a worker acquires
40 QCs they are “Forever Fully Insured (FFI). Eligibility requirements
for disability insurance are a bit more complex. In what we call Test
1, or the recency condition, if the worker is over 30 she must have at
least 20 QCs in the last 10 years; if she is younger than 30, her QCs
must total at least her current age minus 22 and times 2. In Test 2, the
“fully insured” test, her total QCs at any age must be at least equal
to her current age minus 22. For test 3, she must have at least 6 QCs
by a given age. A given worker could be both forever fully insured and
disability insured, either, or neither. As a result of these program rules,
workers may move into and out of DI eligibility over their lifetimes,
depending on their work patterns.

Medical Eligibility:The Disability Determination Process

The Social Security definition of disability can be characterized by
three factors:

The applicant must have a medically determinable impairment;

The impairment must be expected to last at least 12 months or result
in death;

The applicant must be unable to engage in “substantial gainful activity”
due to impairment, considering age, education and work experience.

Whether a worker is determined to be disabled, under the Social Security
definition, is established by the Disability Determination Services (DDS).
A five-step process determines benefit eligibility using the criteria
listed above. Overall, an application is rejected if 1) the applicant
earns $700 or more per month, 2) the condition is determined not severe
enough to limit the applicant’s capacity to perform work, 3) the condition
is not on the SSA list of disabling conditions or the condition is not
judged to last at least 12 months, 4) the condition does not prevent the
applicant from performing his old job, and 5) the applicant could participate
in other occupations with this condition given his/her education, age,
and work experience

Appeals

If an applicant is denied benefits, he may appeal the DDS decision.
This appeal process has several stages, like the disability determination
process. Each stage of appeal must be performed within 60 days of judgment.
The rejected applicant may request reconsideration by the DDS. The DDS
reconsiders the application. If the appellant’s claim is again rejected
by the DDS, he may request a hearing before an administrative law judge.
Should the ALJ deny the appeal, an appellant can request review by an
Appeals Council. Both the Appeals Council and the ALJ operate within the
Social Security Administrations Office of Hearings and Appeals. Should
both the ALJ and the Appeals Council deny the claim, the last avenue for
appeal is in U.S. Circuit Court of Appeals.

Summary of Major Findings

Who is Eligible for DI and Who is Not?

Patterns for Men

Young men tend not to be forever fully insured (FI). Over 70 percent
attain DI coverage by their early 20s, and coverage rates rise gradually
to about 90 percent as men approach their mid 40s. After that, DI coverage
falls back a bit and levels off, as work patterns become more erratic
in the 50s and 60s.

There are no significant differences in either FFI or DI coverage
between married and nonmarried men.

Patterns for Women

The patterns for women are quite different. FFI status for women,
as for men, starts low at young ages. However, women’s rates of coverage
rise gradually, reaching 50 percent by age 50 and continuing to steadily
rise until age 65. Even at older ages, however, women are 20 percentage
points less likely to be forever fully insured than men.

The sex difference in DI rates is even more striking. Women’s coverage
for DI stands at only 40 percent at young ages, and falls to around
30 percent through the 30s. Coverage then rebounds somewhat in the 40s,
when market work again becomes significant in many women’s lives. Rates
of DI coverage reaches a high of about 65 percent later in life, about
20 percentage points lower than that for men.

Married women have much lower levels of FFI and DI insurance than
do nonmarried women. Even among nonmarried women, however, the peak
DI coverage rate of 70 percent at older ages is substantially lower
than for men.

Reasons for Ineligibility

Of the respondents who are ineligible, the predominant cause is failure
to meet the recency condition. This cause of ineligibility continues
to be a substantial barrier even at older ages.

The fully insured test eliminates almost 30 percent of younger workers,
both men and women. In later years, fewer men are eliminated by this
test, but many women continue to fail this condition. Some 60 percent
of women who are ineligible still do not meet this requirement in their
50s and 60s.

Which Factors are Most Important for Coverage?

Women are much less likely to be DI insured than men.

Across several different measures of health status, older workers
suffering health problems are less likely to be DI insured, despite
potentially having a greater need for such benefits than healthier workers.
This holds true for both men and women.

Workers who are not DI insured and also report being in poor health
comprise 9 percent of the total sample. This group of workers is worse
off than their counterparts on several other measures of well-being.
Of those who are not DI insured and report a work limiting disability,
28 percent are insured for retirement benefits and report their disability
as preventing work. In the event of an increase in the early eligibility
age, these disabled workers could not receive DI as a substitute for
Social Security early retirement benefits.

Who Applies for DI? Over an 8-year period of observation 8 percent
of respondents applied for DI benefits. Of these, about half were initially
awarded benefits. Of those who applied and were rejected, about half appealed.
Of those who appealed, 44 percent were subsequently awarded benefits.
Thus 8 percent of respondents applied, and ultimately 60% of these applicants
were awarded benefits.

Accounting for relevant baseline characteristics such as age and occupation,
we find that older workers who are poorer, in worse health, and have less
education are the most likely to apply for DI benefits.

Who is Awarded or Denied Benefits? Although we expected that the
same workers who were more likely to apply (poorer and in worse health)
would also be more likely to be awarded, we did not find this to be the
case. In fact, there were few statistical differences between those awarded
and denied benefits. Workers with a middle level of lifetime Social Security
earnings were more likely to be awarded than those with high lifetime
earnings.

Who Appeals and Who is Awarded on Appeal? We expected that those
with more to gain by appealing (with lower income and wealth) would be
more likely to appeal. However, we found little to distinguish those who
appealed from those who did not. Higher non-Social Security wealth was
associated with award upon appeal and more black applicants appear to
be awarded through appeal than through initial award.

Conclusion

A significant number of Americans-- about 20 percent of women in later
life--are uninsured for disability under Social Security. Family structure
seems to play an important role in the insured status of women but has
little effect for men. It appears that marriage and childbearing, in this
cohort of workers at least, make women more susceptible to losing DI insurance
coverage than men. Wealth, income, and good health improve the likelihood
of being DI insured for both men and women.

Of particular concern is our finding that those who are in poor health
and are not DI insured have the lowest levels of financial well-being.
In general we find strong evidence that workers who were initially poor,
in poor health, and had fewer years of education were more likely to apply
for DI benefits, but few factors differentiate individuals beyond the
application phase. Even collapsing initial and secondary DI awards into
a single award category yielded similar results. One caution should be
noted. Although the initial sample size was quite large, recall that only
8 percent applied for DI benefits. This reduced the sample to such a degree
that our power to explain differences between those who were awarded and
denied and then between those who did and did not appeal may be limited.

Some Social Security reform proposals posit that raising the early retirement
age under Social Security could improve the system’s solvency. However
this would also alter the opportunity set available to older workers.
If some early retirees respond to the policy by applying for DI benefits,
Trust Fund savings are mitigated. Our research identifies the characteristics
of older workers who apply for DI under current rules, those who are rejected
after application, and those who then go on to appeal, which provides
policymakers with insight regarding the potential well-being of the "at
risk" population if the early retirement age were to be raised. Our future
work will incorporate results from this study into more elaborate models
of Social Security benefit take-up patterns.

The Supplemental Security Income Program and Incentives
to Claim Social Security Retirement Early by Elizabeth T. Powers and David
Neumark

Executive Summary

The Supplemental Security Income (SSI) provides a uniform federal safety
net for the elderly and disabled. SSI benefits combined with supplemental
state benefits potentially comprise a substantial source of income for
the elderly poor. Because many elderly SSI recipients also receive Social
Security, characteristics of the SSI program may influence use of social
security, and vice versa. One interesting question is whether the design
of SSI encourages "early retirement" in the Social Security system. In
this Issue in Brief, we provide results of an investigation of this potential
SSI-Old Age Insurance (OAI) program interaction. Because SSI is a welfare
program, this topic is of general interest for understanding the retirement
process of very low-income people and the potential supports that enable
their retirement. It may also be helpful in understanding how ongoing
and planned changes in the social security system affect the lowest-income
beneficiaries.

To study this question, we use multiple panels of the Survey of Income
and Program Participation (SIPP) that are linked to confidential Social
Security Administration (SSA) data. We develop three types of evidence
on the issue of whether SSI encourages earlier OAI claiming. First, we
examine how the structure of SSI affects the financial return to delaying
retirement from age 62 to the full retirement age (65 in our sample era).
Second, we look for patterns in the timing of SSI and OAI first claims
that suggest complementary program use. Finally, we estimate the probability
of an early OAI claim as a function of SSI status and other household
characteristics. We find that SSI recipients face quantitatively important
financial incentives to claim OAI early; that SSI applications appear
to vary with eligibility for OAI at age 62; and that SSI-aged program
applicants are substantially more likely to make an early OAI claim, even
holding family structure, health status, education, and expected Social
Security replacement rates constant. While we stop short of claiming to
have demonstrated a "causal" effect, due to data limitations, a credible
case is made that program interactions plausibly affect retirement in
unintended ways.

Supplemental Security Income

Sufficiently low income and asset units (individuals or couples) may
receive SSI beginning at age 65. Benefits are equal to a maximum benefit
amount minus one-half of monthly earned income over $65, all of unearned
income over $20, and all of means-tested transfer income. For example,
for a unit with monthly income of $165 from earnings, $50 from social
security, and $100 from Veterans' Benefits, a total of $85 per month will
be disregarded, and the unit will keep an additional $50 of earned income.
Therefore, the benefit is determined by subtracting $135 from the maximum
monthly SSI benefit.

Although people become eligible for SSI at age 65, the program can affect
work effort and OAI claims earlier in life. In general, SSI likely decreases
labor force participation--as we have shown in past work--because of very
high implicit taxes on pension income (i.e., 100% above the $20 disregard).
The asset test in SSI also discourages the additional work one would need
to generate retirement savings. A separate issue is that the standard
disincentive for individuals to make early OAI claims --the actuarial
reduction in OAI benefits--is nullified at age 65 by the SSI program.
In effect, SSI rules turn a permanent "penalty" for early retirement into
a temporary state of affairs, lasting only until age 65. All of these
features tilt the balance towards earlier OAI claiming. The empirical
portion of our paper attempts to characterize just how much.

Data

To test our theoretical prediction, we used interview data from the Survey
of Income and Program Participation (SIPP) for 1984, 1990, 1991, 1992,
1993, and 1996. SIPP data come from large, nationally representative groups
of households. We restrict attention to male-headed units (see our paper
for a discussion of the special issues with women). We also use SSA records
matched to SIPP data on SSI applications and payments, OAI eligibility
status, OAI benefits, and social security earnings histories. Given this
information, we can determine household characteristics, the incidence
and timing of application to SSI, whether these applications were successful,
and the timing of OAI receipt.

Descriptive Information on SSI and OAI Claimants

We first establish that OAI is a relevant concern for many SSI units.
In fact, nearly 90% of our sample men who have an SSI application on record
have some Social Security covered earnings since 1951. Of the group with
any covered earnings, 61% are computed to be eligible to claim OAI at
age 62 (i.e. have amassed 40 or more covered quarters by age 62). Therefore,
it is plausible that the use of OAI and SSI may be interrelated for a
significant share of aged men in SSI.

Another plausibility issue is whether our sample men take up SSI near
to age 65. Our theory suggests that they should; once early OAI is taken,
to delay SSI receipt is simply to stretch out the "punishment phase" (i.e.,
suffering the actuarial reduction) for early OAI. In general, we find
that SSI payments are strongly age-dependent, with a spike at age 65.
The number of people receiving their first payment at age 65 is five times
larger than the number receiving a first payment at age 62, and three
times larger than the number at age 66. Looking more specifically at the
relationship between early OAI and SSI claiming, we show that the age-pattern
of SSI receipt for men who are eligible for OAI at age 62 is more compressed
around age 65 than for men who are not eligible for early OAI.

Major Findings

We provide two pieces of specific evidence on the quantitative importance
of the incentives to take early OAI under SSI. First, we estimate the
financial loss from delaying the OAI claim from age 62 to age 65, given
use of the SSI program at 65. We find that SSI recipients on average face
a very large loss of 7% per annum in old age transfer wealth because of
the design of the SSI system.

The second thing we do is to estimate the probability of an early OAI
claim as a function of SSI-aged applicant status, controlling for other
important factors (age-in-sample, birth cohort, marital status, education,
race, the state unemployment rate, spouse age and spouse covered quarters,
and the age-62 Social Security benefit replacement rate). The major finding
is that among the group of men that is eligible for OAI at age 62, the
individuals in aged units applying to SSI are 24%-points more likely to
have entered OAI early. While we find this figure plausible given the
very large financial penalties to delaying retirement under SSI, we cannot
rule out a competing hypothesis that early contact with SSA through OAI
is an important means for learning about the SSI program with the available
data.

Conclusion

This paper builds on our previous work, which found that SSI program
rules significantly influence household behavior prior to the SSI eligibility
age of 65. Quite aside from behavioral issues, the evidence presented
here suggests lessons for program design. Welfare systems can unintentionally
build in perverse financial penalties when they interact with other programs
used by the same population. Changes in program design that would better
integrate SSI and social security, such as giving SSI recipients greater
credit for their social security contributions (Burkhauser and Smeeding,
1981), would reduce the SSI-induced differential in the financial terms
of delaying retirement. (Alternatively, if it is thought that the impoverished
elderly gain too many resources by exploiting both OAI and SSI, penalties
for early retirement similar to those under OAI could be extended to SSI).
Aside from changing the programs, if policymakers want impoverished groups
to rely on government transfers in their early 60s, and if–as seems likely–not
all potential beneficiaries take account of the SSI-OAI interaction–then
SSA could advise all households with low social security earnings histories
that under SSI it may be advantageous for them to make an early OAI claim.

The MRRC provided funding for the conference, Improving Social Insurance
Programs, that was held at the University of Maryland College Park on
September 13th and 14th. The program was organized by John Rust of the
University of Maryland, John Laitner, MRRC Director, and Robert Willis
of the University of Michigan. Multiple sessions met concurrently over
the two days of the conference.

In September 2003, Commissioner of Social Security, Jo Anne Barnhart,
presented an approach to improving the disability determination process
that would shorten decision times, pay benefits to people who are obviously
disabled much earlier in the process and test new incentives for those
with disabilities who wish to remain in, or return to, the workforce.

Commissioner Barnhart’s approach is the result of more than a year and
a half of study and discussions with groups involved in the disability
process – including Social Security employees from across the country,
state Disability Determination Services (DDS), Administrative Law Judges
(ALJs), health care providers, the federal courts, claimant attorneys
and representatives, claimant advocacy groups, Members of Congress and
concerned members of the public.

Under the current process, it takes an average of 628 days for a Social
Security disability application that is denied and appealed at each step
to reach final agency action.

None of the suggested changes would require legislative action; none
would adversely affect the employment status of current Social Security
or DDS employees.

Commissioner Barnhart’s approach is predicated on successful rollout
of the Accelerated electronic Disability process (AeDib). AeDib creates
an electronic folder for the claimant’s application, medical information
and other data. AeDib will eliminate numerous time delays and financial
costs related to locating the paper file, maintaining its contents and
mailing them from office to office. The Social Security Administration
is currently piloting AeDib in three states, and will phase in its use
nationwide during an 18-month roll-out.

At a hearing before the House Ways and Means Subcommittee on Social Security,
Commissioner Barnhart described highlights of her approach. They include:

The establishment of expert units and screening for “quick decision.”
New medical expert units would be organized by areas of clinical specialty
(e.g., orthopedic, pediatric, psychiatric) and located in Social Security
Regional offices. These units would provide assistance for disability
decision makers at all levels of the determination process (DDS examiners,
ALJs, etc). Through a “quick decision” process, these units would screen
claims for applicants who are obviously significantly disabled (e.g.,
ALS, end-stage renal disease, aggressive cancers) and approve them before
they are sent to a state DDS.

DDS examiners would be required to more fully document and explain
the basis for a decision to deny a disability claim. The DDS reconsideration
stage of the current appeal process would be eliminated. Federal Disability
Quality Branches, which presently review DDS decisions, will be replaced
by an in-line quality review and a centralized quality control. As
a result of “quick decision” and elimination of reconsideration, the
DDS would be able to devote freed-up resources to better documentation
of decisions.

The creation of the Federal Reviewing Official position. If
a claim is denied by the DDS, the claimant would be able to ask for
an independent review by a Federal Reviewing Official. The Reviewing
Official, an attorney, after a thorough examination of the record, would
either approve or deny the claim. If the claim is not allowed, the
Reviewing Official would prepare a written report outlining the reasons
the claim should be denied or outlining the evidence needed to successfully
support the claim. This report would be provided to the claimant.
If the Reviewing Official’s decision is appealed, a de novo hearing
would be scheduled before an ALJ, who would also receive a copy of the
report.

Closing the record following the ALJ hearing. Following a
hearing, the ALJ will issue a written opinion explaining the basis for
the decision, and the record will be closed. The Appeals Council stage
of the current process is eliminated.

Quality control for disability claims will be centralized, with
end-of-the-line reviews and an Oversight Panel. An Oversight Panel,
consisting of two ALJs and one Administrative Appeals Judge, would examine
the case after quality review. If the Oversight Panel affirms the ALJ
decision, that decision would become a final agency action. If the
Oversight Panel reverses the ALJ decision, that decision would become
a final agency action. Claimants would continue to be able to appeal
any final agency action to Federal district court.

Social Security has developed a Service Delivery Plan to eliminate backlogs
within a 5-year period. The President’s FY 2004 Budget Request provides
significant additional funding to begin to eliminate these backlogs.
Backlogs at the DDS have already been reduced. Progress is being made
at hearing and Appeals Council levels.

Social Security plans to conduct several demonstration projects aimed
at helping people with disabilities return to work. These projects would
support the President’s New Freedom Initiative and provide work incentives
and opportunities earlier in the process. They would include: early intervention
demonstration projects that provide medical and cash benefits and employment
supports to applicants who elect to pursue work rather than disability
benefits; temporary allowance demonstration projects that provide immediate
cash and medical benefits for a specified period to applicants who are
highly likely to benefit from aggressive medical care; interim medical
benefits demonstration projects that provide health insurance coverage
to certain uninsured applicants whose medical condition is likely to improve
with medical treatment; and ongoing employment supports to assist beneficiaries
who wish to obtain and sustain work will also be tested.

In 2001, the Social Security Administration processed over three million
disability claims. This chart provides a gross summary of the outcome
of these initial claims Approximately forty percent of disability applications
are approved at the first level of the process. Most claims are allowed
(54 of 100), and most allowances are made at the initial level.

The Inter-university Consortium for Political and Social Research (ICPSR)
now offers instant online data analysis for several studies (www.icpsr.umich.edu/access).
Of interest is the National Health Interview Survey: Longitudinal Study
of Aging. The data analysis system (DAS) enables users to perform online
analysis directly over the Web, without downloading files. This is especially
useful for users who do not have statistical software installed on their
current workstation. In addition, DAS enables users to create and download
subsets of the data files. ICPSR also offers a wealth of data on aging
through their National Archive of Computerized Data on Aging (NACDA) (www.icpsr.umich.edu/NACDA).

Abstract: More than 40 percent of Social Security beneficiaries
continue to work after age 65. This research investigates the extent to
which these individuals substitute labor across periods in response to
anticipated wage changes induced by the Social Security earnings test.
While we find that a disproportionate number of individuals choose earnings
within a few percentage points of the earnings limit, we find no evidence
that these individuals substitute labor supply between ages 69 and 70
when, in our sample, the tax on earnings falls from 50 percent to zero.

Abstract: This paper uses panel data from the Health and Retirement
Study to estimate the relationship between measures of labor supply flexibility
and portfolio-choice decisions by utility-maximizing individuals. Seminal
research on portfolio decisions over the lifecycle, and recent research
on stochastic dynamic programming models with endogenous labor supply
and savings decisions suggest that, other things equal, individuals with
more labor supply flexibility are likely to invest more in risky assets,
regardless of their age, because of the insurance component that flexible
labor supply provides. After controlling for panel sample selection and
unobserved heterogeneity I find that labor supply flexibility leads to
holding between 12% and 14% more wealth in stocks.

Abstract: The effects of poor health habits on mortality have
been studied extensively. However, few studies have examined the impact
of these health behaviors on workforce disability. In the Health and Retirement
Study, a nationally representative cohort of 6044 Americans who were between
the ages of 51 and 61 and who were working in 1992, we found that both
baseline smoking status and a sedentary lifestyle predict workforce disability
six years later. If this relationship is causal, cost-benefit analyses
of health behavior intervention that neglect workforce disability may
substantially underestimate the benefits of such interventions.

The Workshop on the Economics of Social Insurance Policymaking: Theories,
Models, and Methods, co-sponsored by the University of Maryland, MiCDA
and MRRC, was held at the Maryland Population Research Center on the campus
of the University of Maryland, College Park in September. The workshop
was designed for government agency and graduate student policymakers and
analysts, and others interested in surveying the current trends in economic
analysis of social insurance, with specific focus on social insurance
policy making. The lectures surveyed the latest theories and models and
provided "hands-on" demonstrations of how to solve them numerically, how
to estimate and test them statistically, and most importantly, how they
can be used in practice. Simulations using these models yield quantitative
forecasts, important tools that assist policymakers in designing effective
policies and assessing the political consequences of alternative policies
(including whom policy interventions hurt and help).